Amazon’s California tax squeeze

A WSJ follow story waters down an LAT scoop from two weeks ago

Amazon’s long run of not paying collecting state and local sales taxes is coming to an end as legislatures finally force the Internet retailer to compete on something of a level playing field with everyone else.

But that doesn’t mean the company isn’t trying to squeeze every last drop out of the struggling communities whose infrastructure enables its profits.

The Wall Street Journal reports that the company Jeff Bezos built on tax avoidance has sounded out at least one municipality in California about keeping for itself some of the tax revenue it will be forced to collect from consumers starting next year.

But this is something of a weak effort by the WSJ, which basically shoots down its own thesis in the third paragraph.

The Los Angeles Times’s story, which it broke nearly two weeks ago, was much better. This one from McClatchy’s San Bernardino County Sun—although it came nine days after the LAT’s scoop—also has some key information missing in the WSJ. The LAT reported in its May 19 lede that Amazon is “poised to pocket millions of dollars in sales taxes paid by California customers.”

First, a little background. The Supreme Court ruled in the early 1990s that retailers have to have a physical “nexus” in a state to be forced to collect sales taxes there. Bezos once dreamed of building his company on an Indian reservation in California to avoid having to collect sales taxes and to give his website an unfair advantage over bricks-and-mortar retailers. Bezos later started up in Washington state because it had a relatively small population and would go on to have his employees use special business cards when traveling to California, rather than the normal ones, in case the tax authorities happened to be on the trail.

The LAT reported that San Bernardino “is working on an agreement with Amazon that would give the retailer as much as 80% of its share of sales taxes in the first few years, according to city spokesman Jim Morris,” who ought to be plugged in since he’s the mayor’s son. Morris later told the Sun that “there will likely have to be some sales-tax sharing agreement,” though he later tried to walk back his statement, saying that “it would be incorrect to say the city was actively negotiating a tax-sharing deal.”

The Journal leaves us at the not-actively-negotiating part without noting Morris’s previously published comments.

It’s also unclear from the Journal’s piece what kind of leverage Amazon would have over the cities of San Bernardino and Patterson. After all, Amazon’s distribution centers are already under construction there, as it reports.

That’s a strange omission, particularly because it’s at the core of the LAT’s story:

California law allows some merchants to designate a legal “point of sale,” permitting them to direct 100% of the city share of sales taxes to a specific community where they have a physical presence.

This gives online retailers such as Amazon tremendous leverage to negotiate sales-tax rebates from cities that want one of their facilities.

In other words, Amazon can pit the two cities against each other in a race to the bottom on who can hand out the most lavish corporate-welfare package. That’s a huge part of the story that the WSJ just misses.

Fortunately, the paper does note that the corporate welfare issue is bigger than just Amazon. It reports that San Bernardino, which has been slammed in this recession, already gives the department store Kohl’s a share of the sales tax it collects there.

Even so, the LA Times’s earlier story was better on that area too:

The Bay Area city of Martinez this month approved a sales-tax-sharing agreement with S&S Supplies and Solutions, a seller of industrial supplies. Under that deal, the city will give up 80% of sales taxes generated by future growth in company sales. That works out to about $800,000 annually by 2015 if S&S sales hit company targets.

City Manager Philip Vince said he recommended that pact, but only because he feared that the company would relocate. “It’s kind of the worst nightmare,” Vince said. “We’d like to have the growth and the full sales tax.”

The LAT reports that Patterson’s unemployment rate is 20 percent. San Bernardino’s is 17 percent. These are Great Depression-like numbers, and a $94 billion corporation is thinking about squeezing them for a few million desperately needed dollars.

Some California politicians are trying to pass legislation to end the destructive begging for scraps by competing municipalities:

“When you have jurisdictions that have their own budget problems, and they’re dealing with very large, very sophisticated corporations, it’s a huge problem,” said California State Sen. Mark DeSaulnier.

Mr. DeSaulnier, a Democrat, said he is considering proposing a law that would prevent local governments from giving sales taxes back to companies, unless they can demonstrate why it is in the best interest of the state.

Well, they’re “considering proposing” it, anyway.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,